By Josie Cox
European markets slipped Monday as tensions between Russia and
the West intensified and the Middle East endured the deadliest day
of fighting between Israelis and Palestinians since the most recent
conflict began.
The Stoxx Europe 600 was trading 0.4% lower by early afternoon,
with losses extending across all the continent's main bourses. In
currency markets, the ruble fell against both the euro and U.S.
dollar, while Russia's Micex and the dollar-traded RTS Index
declined 2.6% and 2.3% respectively, hitting fresh two-month lows.
Futures don't always accurately predict moves at the open, but the
S&P 500 in the U.S. was indicated dwindling 0.2% after the
bell.
Over the weekend, the U.S. leveled its most explicit allegations
yet of Russia's involvement in the downing of a Malaysia Airlines
flight last Thursday that left 298 people dead, and subsequent
efforts to conceal evidence.
European leaders threatened broad new sanctions against Moscow,
departing from their initially muted reaction and marking a turning
point in the standoff between the West and the Kremlin.
Also weighing on market sentiment, unrest flared across the
Middle East over the weekend. Israel said 13 soldiers were killed
and Gaza officials said 96 Palestinians were killed on Sunday,
including 60 in the Gaza City neighborhood of Shajaiyeh where the
battle of the tunnels was fought.
Initially markets showed a muted reaction to the developments
Monday, with strategists at BNP Paribas noting that the tensions
between Russia and the West will likely exert greater pressure on
President Vladimir Putin to adopt a conciliatory approach, but
later a sense of apprehension spread.
Deutsche Bank strategist Jim Reid described the situation as
extremely dangerous and delicate. He added that despite the
understandable conclusion that the market may be reaching, that
diplomacy is the only sensible outcome, the risk of destabilization
cannot be discounted.
"This story still has a long way to run," he said.
Alberto Gallo, a strategist at Royal Bank of Scotland Group,
said that investors may be putting too much faith in central banks
to rein in tensions and stabilize markets.
"Central banks may manage to overshadow geopolitical tensions
for now and the near future," he wrote in a note, adding that
emerging market bonds particularly, could become particularly
exposed to risks.
Talib Sheikh, a manager of the J.P. Morgan multi-asset income
fund, which is part of a multi-asset platform with over $25 billion
under management, said that volatility was already edging higher in
the wake of this, and that we could see some forced unwinding of
risk-on positioning, if it continues to do so.
Typical safe-harbor assets such as gold and U.S. government
bonds, having rallied in the direct aftermath of the Malaysia
Airlines plane crash, were trading moderately stronger Monday,
too.
Gold added 0.6% to hit $1,317.10 an ounce while the 10-year U.S.
Treasury yield stood at 2.48%, down from around 2.56% before the
crash on Thursday. Yields fall as bond prices rise.
UBS economist Paul Donovan said that if tensions in Russia and
Gaza escalate further, energy prices would be the first to react.
Brent crude, however, was trading little changed on the day, at
$107.10 a barrel.
Elsewhere, the corporate earnings season moved into focus
Monday.
Shares in Julius Baer Group AG led the pan-European index,
adding more than 8%, after the Swiss bank said that assets under
management rose 8% in the first half of this year and announced
plans to take over Israeli lender Bank Leumi's Swiss private
banking operation.
In the U.K., engineer contractor Babcock International Group PLC
rose to the top of the FTSE 100 after the group said that its order
book for the coming year had risen to GBP13.5 billion ($23.1
billion).
Shares in retailer Tesco PLC advanced too, after the U.K.'s
biggest retailer said Chief Executive Philip Clarke would leave the
company in October to be replaced by Unilever executive Dave Lewis.
That news offset Tesco's latest profit warning.
Write to Josie Cox at josie.cox@wsj.com